Retail owners starting to hit a wall in Chicago

The retail sector has faced numerous challenges since the rise of e-commerce. The story is no different in Chicago where owners and brokers are struggling to fill storefronts both large and small.

In Chicago, overall retail space vacancy grew modestly over the past year, according to a market report from Marcus & Millichap. The pace of absorption is slower than in years past, especially as empty big box locations encounter difficulty finding large tenants, or a cluster of smaller vendors, to occupy their footprints.

The vacancy rate in the overall metro increased 30 basis points year-over-year to 6.5 percent. City neighborhoods near the loop are demanding higher asking rents as vacancy declines slightly. River North retail rents are $39.20 per square foot and the vacancy rate is at 5.7 percent; in River West, asking rents are nearly $48.00 per square foot and vacancy dropped slightly to 5.5 percent.

The tightest submarket is Kenosha County, where the vacancy rate dropped 160 basis points to 3.3 percent. The West Loop also has a low 3.5 percent vacancy rate, though of course asking rents more than triple what they are in Kenosha County ($34.37 compared to $11.41 per square foot).

As the market adjusts to the influx of available space, and the substantial vacancy decreases of previous years begin to slow down, there is depressed need for new construction. Year-over-year, the metro witnessed the construction of approximately 1.8 million square feet of new retail space.

Nearly 500,000 square feet of that was in the urban center—half of which was in Lincoln Park which saw more development than any other submarket. An inflow of downtown jobs is bringing developers to the core as they look to capitalize on the infusion of new households.

As well-paid young professionals settle in neighborhoods like Fulton Market and West Loop, the higher spending power in these areas is attracting a deeper pool of retailers to the CBD. Assuming they go ahead as planned, recently approved megadevelopments such as Lincoln Yards and The 78 will further strengthen the downtown retail market in the coming years.

In the suburbs, construction has tapered off though there was approximately 1.3 million square feet delivered. Northern communities benefited the most, logging more than 700,000 square feet.

Vernon Hills is home to one of the Midwest’s largest ground-up retail center developments, Mellody Farm, owned by the largest grocery-anchored REIT in the country, Regency Centers Corporation. Completed in 2018, the project has started welcoming retail anchors like Whole Foods Market, REI, Nordstrom Rack, HomeGoods and Barnes & Noble. Dallas-based real estate investment firm Centennial also plans to redevelop the suburb’s 46-year-old Hawthorn Mall.

Another focal point is in Wheeling, where a transit-oriented, mixed-used project includes 100,000 square feet of retail space slated for a 2019 delivery. That project, Wheeling Town Center, has attracted retailers such as Starbucks, Inland Bank, CMX Cinemas and City Works brewery.

Experiential destinations like entertainment retailers, health clubs and a variety of eateries were popular among investors. These “internet-resistant” tenants offer greater defense against the sluggishness affecting the retail sector. Many western and northern suburbs catered to these preferences, luring private buyers as well as several out-of-state and foreign investors.

Older neighborhoods just north of downtown remained targeted areas for local investors as assets in the $2 million to $5 million range are widespread. According to the Marcus & Millichap report, Avondale, Irving Park and Lincoln Park were combed through as relatively tight vacancy makes these communities particularly attractive.

Affordable price points in Northwest Indiana drew many entry-level investors. Cap rates reaching 10 percent extended far above many other Chicago suburbs, making this portion of the metro especially enticing for high-yield strategies. Continuing growth in this region is further suburbanizing the area and making it more attractive for some national retail tenants.